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Non-banks ‘crippled’ by Ottawa’s changes to mortgage lending

Non-bank lenders now control nearly a third of the market for new mortgages in Canada, roughly $100-billion to $140-billion per year.

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Canada's non-bank lenders are reeling from Ottawa's latest moves to cool Canada's housing market, with many forced to immediately hike their mortgage rates or scale back their businesses.

First National Financial, the country's largest non-bank mortgage lender, sent a note to its mortgage-broker clients last week announcing that it had temporarily suspended mortgages for rental properties. It did the same for "stated-income" loans to borrowers who can't verify their employment using traditional means, such as self-employed and contract workers. The company's shares fell nearly 20 per cent last week.

Other lenders reacted similarly in response to changes in mortgage-lending rules that federal Finance Minister Bill Morneau announced last week in order to limit Ottawa's exposure to risks in the housing market, particularly in the overheated Vancouver and Toronto areas. Those changes include tightening rules around qualifying rates for borrowers with down payments of less than 20 per cent and closing loopholes that have allowed some foreign investors to avoid paying capital-gains taxes when they sell property.

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Non-bank lenders now control about a third of the market for new mortgages in Canada, roughly $100-billion to $140-billion per year. Most compete directly for the same clients that are attractive to banks – borrowers with good credit scores and stable incomes – but have been able to offer lower rates or more flexible terms than the major banks.

"This has essentially crippled the non-banks," said Ron Butler of Butler Mortgage, an online brokerage. "It's like you took one of their legs and broke it in a compound fracture."

Mr. Butler predicted many non-bank lenders would see their market share shrink significantly over the next year, with some doing 50 to 60 per cent fewer mortgages in the wake of the new rules. "It really is a massive, massive change," he said.

Another lender, Merix Financial, told brokers it would no longer offer mortgages on rental properties and refinancing after Nov. 15. Homeowners refinance their mortgage by breaking their existing contracts early and taking a new mortgage, either to take advantage of a lower interest rate or take equity out of their home to pay other expenses.

MCAP Financial told brokers it will increase interest rates for new mortgage applications by 10 basis points. (A basis point is 1/100th of a percentage point.)

Starting in December, MCAP said it will also limit amortization periods on new refinancing applications to 25 years and increase interest rates on those loans by 15 basis points.

RMG Mortgages, which is owned by MCAP, said it was ending 35-year mortgage amortizations starting next month and would hike rates on "stated-income" mortgages by 15 basis points.

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It is Ottawa's new rules for portfolio insurance that have dealt the biggest blow to the country's "monoline" lenders, financial institutions that have only one line of business – mortgages – and operate predominantly through networks of independent mortgage brokers, rather than through bricks and mortar retail branches.

Borrowers with down payments of less than 20 per cent are required to take mortgage insurance. But lenders will often separately take out portfolio insurance on pools of their uninsured mortgages, those with down payments of 20 per cent or more, so that they can sell the loans to investors through CMHC's mortgage-backed securities programs.

Until now, portfolio insurance has given non-bank lenders access to a cheap source of financing, allowing them to offer mortgages at interest rates that are competitive with the major banks, which have other ways to fund their mortgage businesses, such as deposits.

Under the new portfolio insurance rules that kick in Nov. 30, lenders will no longer be able to insure mortgages with amortization periods beyond 25 years, those on homes worth more than $1-million, rental properties, or mortgage refinancing.

That is forcing lenders who have relied heavily on government-backed portfolio insurance to scramble to find other ways to finance these portions of their mortgage business or scrap them entirely.

Several industry players say the new rules will make it far more difficult for alternative lenders to compete with the major banks, who rely less on portfolio insurance to fund their mortgage business and who will likely be able to absorb the increased costs of stricter mortgage-insurance regulations without hiking rates on their mortgage products.

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"Tightening of mortgage regulations generally, people are generally on board with that," said James Laird, president of mortgage brokerage CanWise Financial. "What we're not on board with is systematic changes that benefit the banks at the cost of the mortgage brokers backed by monoline lenders."

If Ottawa goes ahead with plans to force lenders to share in the cost of defaulted mortgages that are covered by its government-backed mortgage insurance, that may push some smaller lenders to shut down entirely, while others may have to scale back their operations and lay off staff, Mr. Butler said.

"The banks are the only companies in Canada who could immediately absorb risk-sharing and not have to raise their rates immediately," he said. "They could sit back and watch their competitors just dry up and blow away."

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About the Author
U.S. Correspondent

Tamsin McMahon is a U.S correspondent for The Globe and Mail, based in California. She previously covered real estate for The Globe. Prior to joining the paper in January 2015, she worked at Maclean’s magazine covering business and the economy, where she was nominated for two National Magazine Awards. More

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